corrs
in brief
april 2008
MAKING BUSINESS
SENSE
The High Court on Termination
for Breach of Contract and the
Availability of Loss of Bargain
Damages
By Greg Weeks, Litigation Group, Sydney
In Gumland Property Holdings Pty Limited v
Duffy Bros Fruit Market (Campbelltown) Pty
Limited [2008] HCA 10, the High Court has
handed down another unanimous judgment
clarifying an important issue in contract law.
As it did in Koompahtoo Local Aboriginal Land Council &
Anor v Sanpine Pty Limited [2007] HCA 61 on the issue of
repudiation, the court has shed light on the manner in which a
contract is able to be terminated and the rights which each of
the parties have when it is. Overall, it is a judgment strongly
in favour of giving effect to the express terms of the bargain
struck between the parties.
The main point to take away from Gumland from the point of
view of drafting contracts is that a clearly-expressed contract
will be construed consistently with its wording. If there has
not been actionable unfairness in the formation of the contract,
courts will not entertain such arguments where the express
words of the contract clearly indicate the bargain made
between the parties. Therefore, parties should endeavour to
be as explicit as possible about the content of their bargain
and ensure wherever possible that it is reflected in the
express words of the contract.
THE FACTS
The appellant’s predecessor in title (Lessor) owned premises
in a shopping centre, which it leased to the defendant (Lessee)
from 1993. It was an essential term of the lease that rent
be paid on time and that, in the event that the Lessor or its
successors in title should use the express contractual right of
termination which was consequent on non-payment of rent,
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that the Lessee (and its guarantors) be liable to the Lessor
for loss of bargain damages (that is to say, for all the moneys
payable to the Lessor during the remaining term contract had
it not been terminated).
By 1999, difficult trading conditions had caused the Lessee
to fall into arrears in rental payments and, as part of an
accommodation with the Lessor, it entered into a Deed
which relevantly provided that:
(i)a sub-lease be created over part of the premises, with
the sub-lessee to pay rent directly to the Lessor but
responsibility for payment of the rent still resting with
the Lessee;
(ii)the rent payable by the Lessee be conditionally reduced;
and
(iii)the terms of the lease be ratified subject to the terms of
the Deed.
In 2001, the sub-lessee, while still in occupation of part of the
leased premises and in breach of its obligations, unilaterally
decided to pay only half of the rent payable. This had the result
of placing the Lessee in breach of the requirement under the
Deed that it meet any shortfall in the rental payments to the
appellant (the successor in title to the Lessor). As a result, the
appellant terminated the lease and commenced proceedings
for, inter alia, arrears of rent and loss of bargain damages.
SUPREME COURT OF NSW
The Trial Judge relevantly held that:
(a)the failure of the sub-lessee and Lessee to pay the whole
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corrs in brief – april 2008
The High Court on Termination for Breach of Contract
and the Availability of Loss of Bargain Damages
of the rent was a breach of both the Deed and clause 3
of the lease, which was specified as an essential term
allowing termination for breach; and
(b)the failure of the Lessee to pay the rent owed by the sublessee breached an express essential term of the lease and
therefore allowed the appellant to recover loss of bargain
damages as well as arrears of rent.
NSW COURT OF APPEAL
The Court of Appeal unanimously reversed part of the Trial
Judge’s decision, finding that breach of the Deed did not cause
the Lessee to breach clause 3 of the lease and that therefore
the appellant had not been entitled to terminate the lease.
The result was to deny the appellant loss of bargain damages.
(later in the judgment) to be an essential term, the High Court
noted that the Lessee’s favoured interpretation would have
“unlikely outcome” that a term which was expressly made
essential in 1993 was made inessential in 1999. They rejected
this view and found that clause 3 was breached as an incident
of the Deed having been breached.
2Was breach of clause 3 breach of an essential
term allowing the appellant to terminate and
obtain loss of bargain damages?
The High Court divided the appeal into a number of subissues, with which it dealt separately. The first of these was
whether the Lessee was in breach of the Deed, in respect of
which the High Court upheld the reasoning of the Court of
Appeal to find that it was.
This question did not arise for consideration by the Court of
Appeal on its analysis. The Lessee based its argument on the
judgment of Gibbs CJ in Shevill v Builders Licensing Board
which stated that breach of the covenant to pay rent is not
prima facie breach allowing termination, although parties may
stipulate that the covenant is an essential term. The Lessee
then proposed that it is open to parties to declare a term to
be essential (thereby allowing the innocent party to terminate
for breach) but that such a declaration is incapable of giving
a right to sue for loss of bargain damages unless the breach
amounts to repudiation of the contract. Further, it submitted
that a term which sought to specify that breach would result in
a right to terminate would be invalid.
1Was breach of the Deed a breach of clause 3
of the lease?
The High Court did not accept these submissions. Even in
the absence of repudiation or fundamental breach (which was
common ground between the parties), the court held that:
The Lessee contended that, rather than acting as a variation
of the lease, the Deed was a collateral agreement, breach
of which did not necessarily mean that the lease had been
breached. Therefore, it argued, the provisions of the Deed
dealing with payments of rent under the lease should be
understood as referring to sums paid “in lieu of” rent under
the lease not sums paid “as” rent under the lease.
(a)the parties can provide in a contract for any given term
to be “essential” in that breach of that term will allow the
innocent party to terminate the contract;
THE HIGH COURT OF AUSTRALIA
The Court of Appeal had found no breach of clause 3 of the
lease but its reasoning was “to some extent … inconsistent”
with the Lessee’s argument, according to the High Court,
holding as it did that the Deed did act as a variation to
the lease but that by defining breach by reference to the
“essential” provisions enumerated in the lease, the Deed
prohibited breach of those clauses rather than their subject
matter. The High Court agreed with the finding that the Deed
varied the lease but held that breach of the relevant term of
the Deed amounted to a “failure to comply with the covenant
in clause 3 of the lease to pay rent and outgoings”.
The High Court reasoned that the terms of the Deed did not
create any fresh obligation on the part of the Lessee to pay
rent but merely amended the existing obligation to do so under
clause 3 of the lease. On the basis that clause 3 was held
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(b)the “essentiality” of a term is decided not as a mere
incident of it being labelled as such but with reference to
the powers granted to the innocent party in the event of
breach;
(c)the covenant to pay rent in clause 3 of the lease was such
a term;
(d)as Shevill decided, the fact that breach of a term will allow
termination does not necessarily mean that loss of bargain
damages will become payable to the innocent party in
the absence of repudiation or sufficiently serious breach
(i.e. where the bargain has been “lost” not as a result
of the Lessee’s breach but as a result of the appellant’s
termination);
(e)Shevill would nonetheless have allowed recovery of loss of
bargain damages pursuant to an express contractual term
drafted in “very clear words” that loss of bargain damages
would be payable following termination for the breach of a
corrs in brief – april 2008
The High Court on Termination for Breach of Contract
and the Availability of Loss of Bargain Damages
term agreed to be essential, as was the case in regard to
clause 3; and
(f)therefore, “there is no basis upon which a court could
properly do otherwise than to give effect to the obligations
to which the parties had bound themselves”.
3 Other issues
The court noted that its findings did not change the obligation
of the appellant to mitigate its loss by letting the premises to
another party. In this sense, it was not able to recover twice by
getting both possession of the premises and damages for loss
of the rent which would have been payable over the remaining
term of the lease.
The Lessee had also argued that the court’s construction of
clause 3, described above, should make that term void as a
penalty. The High Court said in response to this argument
that the jurisdiction of equity to relieve against penalties
is discretionary rather than automatic because “to make a
contract containing a penalty has remedial consequences, but
it is not contrary to law”. In this case, it would be a term of the
decision of the court to grant relief that any outstanding rent
and outgoings be paid, a course actively resisted by the Lessee
in its cross-appeal.
IMPLICATIONS
The clear implication of the High Court’s decision is that
parties to a contract should be allowed to allocate risk in
any way that they see fit. Absent vitiating factors such as
unconscionable conduct which would enable the contract
to be declared void, there is no reason that express terms
allocating risk for a given event to one party or another should
not be upheld by the courts. The court stated that “it is open
to parties to agree that a particular term is essential and to
agree on the consequences of breach. That avoids arguments
about whether the term in question is or is not essential
independently of the parties’ agreement that it is and what the
consequences of breach of it are. … Adhering to the obligations
which the parties accept in writing is a purpose of the law to
which this Court must give effect.”
Gumland Property Holdings is an affirmation by the High
Court of a number of issues which have clouded the operation
of contract law in recent years and in this sense stands as a
companion to its decision of last December in Koompahtoo.
The point that stands out most clearly from Gumland are that
issues of fairness (and the court was explicit in it recognition
that the sub-lessee had behaved most unfairly to the Lessee),
while they may bear on whether or not the formation of the
contract has been marred by unconscionability, do not bear
on the construction of express contractual terms. Therefore,
it is open to parties to agree on what consequences flow from
breach of a given term, including that it will allow the innocent
party both to terminate the contract and recover the full
measure of loss of bargain damages.
Chris Pagent
Tel +61 2 9210 6162
chris.pagent@corrs.com.au
Jonathan Kramersh
Tel +61 3 9672 3484
jonathon.kramersh@corrs.com.au
David Abernethy
Tel +61 7 3228 9456
david.abernethy@corrs.com.au
Kirsty Sutherland
Tel +61 8 9460 1620
kirsty.sutherland@corrs.com.au
SYDNEY
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Sydney NSW 2000
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BRISBANE
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Brisbane QLD 4000
PERTH
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240 St George’s Terrace
Perth WA 6000
gold coast
Corporate Centre One
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Bundall QLD 4217
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© Corrs Chambers Westgarth, 2008
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